GENERAL DYNAMICS ORDINANCE SYSTEMS, INC.; AND LOCKHEED MARTIN ORDNANCE SYSTEMS, INC. v. CONCO, INC.
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RENDERED: JUNE 29, 2001; 2:00 p.m.
NOT TO BE PUBLISHED
C ommonwealth O f K entucky
C ourt O f A ppeals
NO. 1999-CA-000490-MR (DIRECT)
NO. 1999-CA-000676-MR (CROSS)
GENERAL DYNAMICS ORDINANCE
SYSTEMS, INC.;
AND LOCKHEED MARTIN
ORDNANCE SYSTEMS, INC.
v.
APPELLANTS/CROSS-APPELLEES
APPEAL AND CROSS-APPEAL FROM JEFFERSON CIRCUIT COURT
HONORABLE GEOFFREY P. MORRIS, JUDGE
ACTION NOS. 96-CI-001534 AND 005129
CONCO, INC.
APPELLEE/CROSS-APPELLANT
OPINION
AFFIRMING DIRECT APPEAL AND CROSS-APPEAL
** ** ** ** **
BEFORE:
BUCKINGHAM, GUIDUGLI AND HUDDLESTON, JUDGES.
GUIDUGLI, JUDGE.
General Dynamics Ordnance Systems, Inc. and
Lockheed Martin Ordnance Systems, Inc. (collectively Ordnance)
appeal from an order and judgment entered by the Jefferson
Circuit Court on November 9, 1998, following a jury trial in
which Conco, Inc. (Conco) was awarded $1,092,281.50 and from an
order and judgment entered February 24, 1999, which awarded Conco
$263,321 in pre-judgment interest.
Conco appeals from a decision
of the trial court which precluded it from seeking damages
stemming from an alleged loss of an unrelated contract.
We affirm.
As these appeals stem from two separate and distinct
contracts, we will address each separately.
ORDNANCE’S APPEAL
Conco’s business centers around the production of
ammunition boxes.
Prior to January 1993, Conco manufactured only
cylindrical containers.
Ordnance operated an ammunition
production facility in Milan, Tennessee.
Ordnance was reimbursed
by the Army for supplies purchased from contractors such as
Conco.
As such, Ordnance’s operation was subject to oversight by
the Defense Contractor Audit Agency (DCAA).
Ordnance was subject
to loss of operating fees for the Milan plant for failure to
follow DCAA directives.
Ordnance had historically been one of
Conco’s biggest customers.
Ordnance was involved with the production of 81mm
artillery rounds for the Army.
In January 1993, Ordnance sent a
formal Request for Quotation (RFQ) to Conco seeking bids for the
production of 76,250 PA156 ammunition boxes (PA156s) for the 81mm
mortar rounds.
According to the RFQ, 22,000 units were to be
delivered to Milan by June 12, 1993, and the balance by December
15, 1993.
The RFQ itself was composed of several different
documents, each of which contained provisions relating to the
production of the PA156s.
The military specifications for the PA156s were
contained in MIL-C-71083, which was a part of the RFQ.
Section 4
of this document dealt with quality assurance provisions.
Section 4.1 provided:
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Responsibility for Inspection. Unless
otherwise specified in the contract or
purchase order, the contractor is responsible
for the performance of all inspection
requirements (examinations and tests) as
specified herein. Except as otherwise
specified in the contract or purchase order,
the contractor may use his own or any other
facilities suitable for the performance of
the inspection requirements specified herein,
unless disapproved by the Government. The
Government reserves the right to perform any
of the inspections set forth in this
specification where such inspections are
deemed necessary to ensure supplies and
services conform to prescribed requirements.
Inspections were to be done on each lot, which consisted of
either 2,304 or 4,608 units.
From each lot, a representative
sample was to be drawn and tested.
Table II of Section 4 set
forth the number of units to be sampled depending on the lot
size, and also stated “Accept on zero and reject on one or more
for all inspection levels.”
Also attached to the RFQ was a document entitled
“General Requirements for Supply of Ammunition Components Martin Marietta Ordnance Systems, Inc.”
Section 3 of this
document dealt with quality assurance issues.
Section 3.1 set
forth applicable quality assurance provisions, which included
“applicable Government specifications and Martin Marietta
Ordnance Systems, Inc. Purchase Description M-PD-200.”
Section
3.2 required the seller to “perform, or have performed, all
inspections, tests, and analyses required by the applicable
specifications and/or purchase descriptions[.]” Section 3.3
stated:
The purchaser reserves the right to conduct
any of the inspections and/or tests on
additional samples, in accordance with the
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applicable specifications as deemed necessary
to confirm acceptability of the items.
The M-PD-200 was also a part of the RFQ.
dealt with “Inspection and Acceptance.”
Section 5
Section 5.2 provided:
All material will be subject to inspection
and acceptance at Milan Army Ammunition Plant
and will remain the property of the supplier
until so accepted. Material rejected by the
purchaser for failing to meet all
requirements will be returned to the supplier
at his expense, unless other disposition is
agreed upon.
Section 5.6 stated:
Inspection at Milan . . . will normally
consist of taking a representative sample
from each lot in accordance with the sampling
procedures of MTL-STD-105. Unless otherwise
specified, Inspection Level II shall be used.
Normally, inspection will be based on single
sampling plan Table II-A for normal
inspection, but the purchaser reserves the
right to use any other applicable sampling
table of MTL-STD-105. The units in the
sample may be examined, inspected, gaged, and
tested as required.
Unlike previous ammunition containers manufactured by
Conco, the PA 156s were square.
In anticipation of bidding on
the PA 156 contract, Conco began negotiating with another company
for the purchase of a production line capable of producing
PA156s.
Conco went as far as to send a copy of the bid
specifications to the other company and ask for assurances that
the equipment could produce the PA156s.
Notes from a meeting of
Conco personnel on February 1, 1993, indicated that Conco
realized it had “daunting circumstances to overcome “if it
obtained the PA156 contract.
Conco ultimately secured the
purchase of the production line and began estimating its bid on
the PA156 contract.
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On February 9, 1993, Conco submitted its formal bid in
which it proposed to produce PA156s at a unit cost of $26.06, for
a total of $1,987,075.00.
Conco characterized its bid as a
“firm, fixed-price quotation” with terms of Net 30 days.
Ordnance ultimately awarded the PA156 contract to Conco.
Prior
to awarding the PA156 contract, Ordnance conducted pre-award
inspections of Conco’s facilities to ensure that its
manufacturing process, including inspection procedures and
equipment, met military specifications.
in compliance.
Conco was deemed to be
On March 24, 1993, Ordnance executed a purchase
order to Conco for 76,250 PA156s at a unit price of $26.06.
shipment schedule was established as follows:
The
First article to be submitted to MAAP by 8
Jul 1993;
3,000 ea to be at MAAP by 22 Jul 1993;
3,750 ea to be at MAAP by 29 Jul 1993;
4,500 ea to be at MAAP by 5 Aug 1993;
5,750 ea to be at MAAP by 12 Aug 1993;
5,000 ea to be at MAAP by 19 Aug 1993;
9,100 ea to be at MAAP by 27 Sep 1993;
9,100 ea to be at MAAP each month thereafter,
continuing until order completion.
The purchase order reflected terms of Net 30 days.
Relevant
portions of the terms and conditions attached to the purchase
order provided as follows:
2. INVOICES:. . .[P]ayment and discount
period expressed within the Purchase Order
are understood to begin from the date of
invoice or date of acceptable goods receipt
at Milan . . . whichever occurs last.
. . .
6. INSPECTION: Acceptance of any article
shall not discharge the seller from liability
and damage or other legal remedy for breach
of any warranty herein expressed or implied
by law or otherwise. Everything delivered is
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subject to final inspection and approval by
buyer at our plant or such other place as is
deemed proper by buyer. Payment by us does
not constitute approval. We are to be the
sole and exclusive judges in our sole opinion
of the suitability of the material to our
use.
Conco produced an initial PA156 sample following the award of the
contract.
The sample was inspected and accepted by Ordnance.
On April 22, 1993, after Conco received the PA156
contract, Ordnance received a letter from the Army regarding a
DCAA audit report finding it to be in non-compliance with
applicable standards.
Specifically, the letter indicated an
over-abundance of inventory in regard to 10 recorded items (which
were not listed), and stated that “[i]t is unreasonable for a
business concern to carry excess dollars in the inventory . . .
without having a requirement outstanding.”
On May 19, 1993, Ordnance wrote to Conco and asked that
the delivery schedule under the purchase order be altered due to
“a major U.S. Government 81mm mortar ammunition realignment LAP
program adjustment from CY 1993 into CY 1994.”
Under the new
schedule proposed by Ordnance, delivery would be as follows:
6,750 ea to be at MAAP during May 1994;
15,250 ea to be at MAAP during Jun 1994;
9,100 ea to be at MAAP each month thereafter,
continuing until order completion.
Ordnance directed Conco to define any increase in cost stemming
from its request in its response and to attach appropriate
documentation.
Conco responded by letter dated June 1, 1993, in
which it estimated a probable cost increase of $85,140.
Conco
indicated that if it “were granted the latitude to schedule
execution on this contract so as to best complement other
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customer commitments, we could avoid or absorb the extra costs.”
It appears that Ordnance never came forth and directly told Conco
that it was having production problems with the 81mm rounds.
On June 7, 1993, an internal memorandum generated by
Ordnance stated in pertinent part:
Subject material purchase order components
for 81mm, M983/M984 were discussed as to
originate a Stop Work release, or to
originate an extension to current contracts.
After full justification of cost and etc. . .
. it was decided for MMOS Purchasing to
extend delivery of each purchase order item
for as long of time that could be economical,
without any cost, to each purchase order
vendor.
On June 24, 1993, Ordnance prepared a change order with
respect to its contract providing:
First article sample to be submitted to MAAP
by 2 Aug 1993;
10,000 ea to be at MAAP by 1 Feb 1994;
10,000 ea to be at MAAP by each month
thereafter, continuing until order
completion.
The change order reflected that no cost increase would be
incurred as a result of the change.
In January 1994, before Conco had commenced production,
Ordnance once again pushed back its 81mm production to JulyDecember 1994, and subsequently requested another change in the
delivery schedule.
In a letter to Ordnance dated January 31,
1994, Conco requested:
that the delivery schedule for PA156
ammunition containers . . . be changed in
order to better accommodate production of
your order for PA120 containers. We propose
to change the delivery schedule to that
requested in your letter of 19 May 1993[.]
. . .
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Conco actually intends to ship somewhat in
advance of this schedule, including initial
delivery in late April.
This agreement was reflected in a change order issued by Ordnance
on February 2, 1994, which was “necessary to modify
subcontractor’s delivery schedule per bilateral agreement[.]” The
change order again reflected no cost increase stemming from the
alteration.
Minutes from a Production Workload Review meeting at
Ordnance on May 11, 1994, showed that its DCAA problems were
ongoing.
One entry dealing with the DCAA states:
Martin Marietta is receiving intense pressure
from the DCAA on ordering more material than
they need to. Martin Marietta orders
material based on the PAS and for no more
than one year at a time. It was suggested
that this HQ concur on schedule when it is
felt they are questionable.
An internal memorandum from Ordnance specifically concerning the
PA156s dated May 16, 1994, stated:
Due to production schedule changes, request
subject material purchase order delivery for
June and July 1994 be moved and added to
November and December delivery. This change
will also help storage space for stores.
To this end, Ordnance wrote to Conco again on May 25, 1994, and
requested yet another revision to the delivery schedule.
Prior to Ordnance’s third request for delay, Conco had
already delivered several PA156 lots to Ordnance in April 1994.
Prior to shipping the PA156 lots, Conco inspected each lot for
defects by randomly sampling a certain number of individual boxes
from each lot.
Under the accept on zero, reject on one standard,
the entire lot was to be accepted if no defects were found in the
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random sampling.1
If Conco found a defect in its sampling, it
would then screen either the entire lot or portions of the lot
for the defect it found.
Thus, the PA156 lots had already been
inspected before leaving Conco.
Despite Conco’s pre-shipment inspection of the PA156s,
Ordnance wrote to Conco on May 31, 1994, and stated that certain
PA156 lots delivered to Ordnance had been rejected due to
deficiencies.
Unbeknownst to Conco at this time, Ordnance was
conducting its own random sample testing on the delivered lots.
Faced with Ordnance’s claims that the first eight lots were
unacceptable, Conco conducted an engineering study and found that
the Army’s schematic drawings of the PA156 were defective in that
there was a discrepancy between the individual part dimensions
and the way they actually fit together.
Due to this defect,
there was no way Conco could produce a conforming product.
The
so-called “stack-up” problem was eventually remedied through the
issuance of change orders and Ordnance ultimately paid Conco for
the first eight PA156 lots.
In August 1994, Ordnance determined that it would begin
production of the 81mm rounds in January-June 1995.
This is best
evidenced by an internal memorandum of Ordnance dated November
17, 1994, wherein it was noted that Conco should begin delivery
of 18,000 PA156s to Ordnance each month beginning in February
1995 in order to accommodate the production of the 81mm rounds in
1
As Conco points out, the accept on zero reject on one
standard was not a zero defect standard because “only a
statistically significant sample from each lot of ammunition
boxes is inspected for each of a number of specified criteria in
order to economically insure product quality.”
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April-May 1995.
The memorandum stated that “[t]his revised
delivery necessary to help cut cost of inventory on hand.”
Faced
with Ordnance’s request for more PA156s, Conco wrote to Ordnance
on September 28, 1994, and expressed the following concerns:
a. The rejection notification letter for Lot
008 dated July 1994, mentioned certain damage
to the handle brackets. Our investigation of
this leads us to conclude that these
containers were most likely damaged by a fork
lift in the handling, loading, or unloading
of the pallets. We do move and load
palletized boxes by fork lift and, certainly,
this problem could have happened here
although we have not had problems with other
products. Nonetheless, we have contacted our
fork lift operators regarding this problem
and instructed them to take extra care in
both the handling and truck loading of these
pallet lots.
It is my understanding that our pallets are
unloaded and handled by forklift at your
facility which means it is also possible that
the damage could have resulted from handling
at your end. Specifically, the fork lift
operators have been instructed to make sure
the fork tines do not extend beyond the
pallet edge and that pallet loads are not
butted against each other while being lifted
or dropped. It would be beneficial if you
could alert your personnel about this as well
to help avoid recurrence of this problem.
b. Overall height and overall width stack-up
problems: As you know, an ECP has been put
forth to resolve the stack-up problem
concerning the overall height. . . .Steps
need to be taken to address the overall width
stack-up problem, just as the overall height
is being resolved. These are clearly design
flaws.
These problems have cost us tens of thousands
of dollars in both the PA156 and the PA125 as
we have tried to make containers to meet the
current, impossible specifications. While we
are not trying to recover these losses as
they pertain to PA 156 units already
produced,cannot perpetuate them. The design
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errors must be corrected (or waived) before
we can resume production of this box.
c. Source inspection at Conco: As we have
discussed, this box calls for extremely high
acceptance standards. The lack of
coordination between our inspection here and
yours there has resulted in double sampling
of each lot. First, it is sampled and
inspected here and then another sample is
pulled and inspected upon receipt at your
location which, in effect, doubles the sample
size. We refer to this as “double jeopardy”
as the two samples being selected from each
lot essentially double the chance for
rejection, (This is especially critical since
acceptance is based on zero defects.) The
net effect is still further tightening of the
quality standard.
We are hereby requesting that the balance of
this order be source inspected at Conco so as
to eliminate the effect of double sampling.
Further, if a lot is rejected, it would
eliminate the shipment of containers back
from your facility to Conco for screening and
the return of these containers to you.
In any event, we must eliminate the double
sampling before we resume shipping containers
to you.
This letter was followed by another letter from Conco dated
November 8, 1994, which stated in pertinent part:
This letter will serve as a follow-up to our
phone conversation today regarding the open
PA156 ammunition box issues. Based on our
conversation, it is my understanding that the
ECP covering both the overall height and
overall width issues has been approved and
goes before the Configuration Control Board
on 11/15 for final approval.
. . .
As I mentioned, it is critical that we are
able to resume PA156 production no later than
Monday, December 5, in order to avoid the
shutdown of our box production line and the
lay off of our production employees.
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With the approval and incorporation of the
ECP, the only other major PA156 issue
involves the sampling and inspection of these
containers. As you know, we are extremely
concerned about what we are referring to as
“double jeopardy.” A full inspection is done
on a sample from each production lot here at
Conco. When the containers arrive at your
location, a different sample is pulled and
the same inspection is done. The result is
that each lot is subjected to the zero
defects criteria for two times the normal
sample size (our sample plus your sample).
Although this has not been a problem in prior
contracts, it becomes much more critical now
with acceptance criteria which have been
sharply tightened.
The best answer seems to be customer source
inspection here at Conco. . . . This would
enable both the Conco inspectors and the
Martin Marietta inspectors to examine the
same sample in parallel, thus eliminating the
double jeopardy issue. It would also mean
that it a particular lot was rejected, it
would still be here at Conco where it could
be screened on the most efficient and timely
basis.
Another alternative would be to designate the
“official sample” here at Conco so that it
could be inspected both here and there. As
we discussed, perhaps DCAS could be
designated to select the sample units from
each lot.
In any event, it is absolutely vital that
both these issues be fully resolved so that
we can resume production on this order in the
first of December. This is the production
window reserved for execution of your order.
In addition, as you are well aware, we have
deferred production on this order as your
requirements have slipped. It has now been
twenty months since the order was placed. We
simply must proceed now to avoid further
escalation and additional carrying costs, as
our pricing was based on the delivery of the
full quantity at 1993 costs.
An internal memorandum from Ordnance shows that a
telephone conference was held on November 17, 1994, to address
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Conco’s concerns.
According to the memorandum, Ordnance
personnel told Conco that:
MMOS’s inspection are [sic] the same for this
order as any other. There have been no
change in MMOS inspection procedures and
Conco’s material is inspected as required in
TDP. . . . I re-emphasized that MMOS could
accommodate delivery schedule of 18,000 Ea.
beginning 1 Feb. 1995 and that this was not a
recommendation to extend or slip schedule,
but only information to supplier regarding
delivery. Stated that MMOS would assist to
the extent that it is plausible to MMOS & the
USG.
Conco responded by letter dated November 17, 1994, which stated
in pertinent part:
2 - Quality Requirements - The issue
surrounding redundant inspections has not,
however, been resolved. As we understand it,
you are refusing to provide concurrent
inspection at Conco by either Martin Marietta
employees, Martin Marietta designated
contract individuals, or by DCAA. Further,
you have refused to achieve the same end by
inspecting (only) the samples we have used to
qualify individual lots to avoid a very
substantial increase of the sample size and
thereby unilaterally imposing a tightened
quality standard. In addition, you have not
yet committed to confine any reinspection
efforts required to the characteristics and
attributes found defective initially which
further tightens quality standards on a
unilateral basis.
These inspection practices which you have
imposed on this contract from its inception,
despite our vigorous protests, have caused us
very substantial expense beyond the scope of
our commitment to you. We simply will not
continue to incur these expenses caused by
your spurious rejection of good products.
Therefore, if Martin Marietta holds to this
series of positions, we will need an
amendment to the Purchase Order increasing
the price by $1.92 to $27.98 to cover this
change in quality requirements.
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3 - Resumption of Production - As we have
told you, we have been reserving the
productive capacity of our box manufacturing
facility to complete this order for you
commencing in early December. Conco must
decide no later than November 23, 1994, to
continue building the PA156 (based on
confirmation from you regarding the design
changes and the acceptability of the price
adjustment cited above to reflect the change
you have imposed on quality requirements) or
to shut that half of our facility down.
If we are forced to shut down, we will be
unable to resume production on your order for
4 - 10 weeks. In view of this additional
delay, we will be further inhibited in
delivery against a contract entered into two
years ago. We will therefore require a price
adjustment to reflect the escalation and
carrying costs which Conco has incurred
through these extensive, frequent delays.
Although we have not attempted to develop
precise estimates of this impact, historical
trends in material costs, etc. indicate it
will be in the neighborhood of 10-15% over
and above the adjustment for changed quality
standards identified above.
Another teleconference between Conco and Ordnance
regarding the sampling issue was held on November 21, 1994.
Ordnance suggested resolving the problem by inspecting the same
sample inspected by Conco upon delivery of subsequent PA156 lots.
Conco agreed to this procedure.
An internal Ordnance memorandum
dated November 22, 1994, indicated that Ordnance would “support
acceptance inspection for future production . . . based on
inspection of the same random sample used for acceptance at
Conco’s facility,” and that the details would be worked out in
the future.
Ordnance wrote to Conco on the same date and advised
that:
Martin Marietta concurs in Conco, Inc’s
request that an official lot sample be
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designated by Conco, Inc. for lot acceptance
purposes by both Conco, Inc. and Martin
Marietta. Based on this concurrence, Conco,
Inc. will segregate and properly identify
this official sample with each lot shipment.
Martin Marietta maintains the right to
perform random incoming inspection sampling
at Martin Marietta’s discretion to insure
product quality. Martin Marietta will
provide technical assistance upon re-start of
production at Conco’s request.
It appears that portions of Ordnance’s prime contract
with the United States Government were negotiated every year.
Terry Smith (Smith), the United States Government Contract
Administrator at Milan testified at trial that one of his ongoing
concerns with Milan was that when a government contract came in
Milan would buy all their needed inventory up front, which would
result in materials sitting in inventory until needed for
production.
To address this issue, Smith inserted an inventory
reduction incentive in the terms of Ordnance’s prime contract
which took effect on December 13, 1994.
Under the incentive,
Ordnance was not penalized for failure to reduce inventory, but
would not receive the incentive bonus if reduction was not made.
While the PA156s were part of the reduction program in 1995, they
were expressly excluded in 1996.
Conco resumed shipment of the PA156s to Ordnance in
January 1995, beginning with Lot 9.
On February 2, 1995, Conco
was notified by Ordnance in a telephone conversation that Lots 9
and 12 were being rejected for stenciling problems.
Conco was
also advised that for all shipments after Lot 12, Ordnance
intended to stop inspecting Conco’s sample, and that Ordnance had
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only agreed to check Conco’s sample “on an interim basis to
assure no gaging conflicts existed.”
Upon receiving this notice of continued defects, Conco
made arrangements for several of its employees to go to Milan and
review the defects which were being reported.
Conco stopped
production on the PA156 contract again, and began producing
PA156s to satisfy another contract.2
According to a trip report
prepared by Conco on April 7, 1995, their employees were able to
review the defects reported by Ordnance.
Following the April
trip, Conco wrote to Ordnance on April 19, 1995, and requested
another round of meetings aimed at resolving their differences.
Ordnance held another Production Workload Review meeting on May
3, 1995.
Minutes from that meeting show that Ordnance did not
anticipate beginning production of the 81mm rounds until “JanJune 1996 period due to various component problems[.]”
Conco and Ordnance personnel met in Milan on May 3,
1995.
Based on Ordnance’s position that many of the defects
could be handled by Conco’s application for a wavier from the
Army on the PA156s, Conco forwarded the information necessary to
obtain a waiver to Ordnance on May 4, 1995.
For whatever reason,
Ordnance did not forward the waiver request to the Army for
another four months, and even when it did some of the required
documentation was missing.
After hearing nothing from Ordnance regarding the
status of the waiver and after calls to Ordnance were no longer
2
This contract was with the Navy. The Navy appears to have
accepted all of the PA156s produced by Conco.
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being returned, Conco prepared a Request for Equitable Adjustment
(REA)
regarding the PA156 contract and forwarded it to Ordnance
on August 23, 1995.
The purpose of the REA was two-fold: (1) to
avoid the costs associated with litigation; and (2) to obtain
compensation for Conco’s costs which were over and above that of
the contract.
According to documentation attached in support of
its claim, Conco was seeking over four million dollars from
Ordnance.
Faced with Conco’s REA, Ordnance decided to pursue
termination of the PA156 contract.
An internal Ordnance
memorandum dated August 31, 1995, states:
Currently we have a number of lots in house
rejected for various conditions ranging from
poor workmanship to design/producibility
concerns. Conco has submitted a package for
consideration which includes screening of
lots for defect conditions, waiver of certain
conditions, and recommendation for ECP action
on other conditions of the hardware. This
plan was worked out with Conco during a May
1995 visitation in an effort to move the
process forward and reach completion of
contract activity with Conco on this item.
Since Conco is by submission of this claim
abdicating all responsibility for their
process and product, I recommend that we
pursue contract termination and re-placement
with another concern. In parallel with this
posture we need to see the current waiver/ECP
package through to completion. Completion of
this package as submitted should, with
screening, make a substantial portion of the
containers in house acceptable. This would
buy significant time (six months estimated)
too for re-procurement of the balance of our
needs.
Ordnance ultimately submitted the waiver request on September 18,
1995.
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On October 4, 1995, Ordnance sent a show-cause letter
to Conco stating its intent to terminate the PA156 contract.
Conco responded on October 16, 1995, by requesting payment of
$1,321,242 representing the outstanding balance on the contract
plus interest in addition to settlement of its REA.
Following a
flurry of communication between Ordnance and Conco pertaining to
the show-cause letter, Ordnance forwarded a letter officially
terminating the PA156 contract to Conco on November 21, 1995.
In January 1996, Conco learned that the Army was
planning to deny the waiver submitted by Ordnance because much of
the information needed to process the waiver was missing.
Conco
reassembled the data and submitted it directly to the Army by
letter dated February 1, 1996.
July 1996.
The Army approved the wavier in
Although a copy of the waiver was sent to Ordnance,
Conco did not learn that the waiver request had been approved
until some time in 1997.
Even after the waiver was issued,
Ordnance refused to pay for the boxes.
Conco claims that the
81mm rounds were still not being produced by Ordnance during this
time due to component problems.
Apparently Ordnance was never able to produce the 81mm
rounds, but eventually received another contract to produce inert
81mm rounds using PA156s.
Subsequently, in July 1997 Ordnance
paid Conco roughly $1,200,000 representing payment in full on the
PA156 contract less screening costs incurred to inspect and
remove PA156s with non-waivable defects.
Conco filed suit against Ordnance on March 12, 1996.
In its original complaint, Conco alleged that Ordnance breached
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the PA156 contract and that it was entitled to payment of extra
costs it incurred in performing the PA156 contract.
made by Conco were similar to those in its REA.
The claims
Conco
substantially amended its complaint in February 1998 to include
claims of fraud as well as tortuous interference and
disparagement in addition to its other causes of action.
Conco’s entire theory was that Ordnance repeatedly
invented defects with the PA156s to avoid taking them into
inventory at Milan because of (1) its repeated delays in
production of the 81mm rounds; and (2) its repeated problems with
DCAA regarding the amount of inventory on hand.
Ordnance refuted
Conco’s claims with evidence that (1) the PA156s were counted as
inventory even if they weren’t paid for; (2) the PA156s were
excluded from the inventory reduction incentive program in 1996;
(3) Ordnance received the maximum incentive payment it could have
received under the inventory reduction incentive program; and (4)
the Army would have reimbursed Ordnance for its purchase of the
PA156s within two weeks of Ordnance’s payment.
The jury was told repeatedly during trial that Ordnance
had paid the contract amount, that it was not to consider damages
resulting to Conco due to the delay in payment, and that the
trial court would award damages for delay in payment in the form
of interest.
In regard to Conco’s fraud claim, the jury was
instructed as follows:
Conco claims that [Ordnance] committed fraud
in the performance of their agreement
regarding the PA 156 ammunition containers
produced by Conco. Conco claims that
[Ordnance] committed fraud on several
occasions, including:
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(1)
Misrepresenting that it would pay for
the PA156 ammunition containers within
thirty (30) days of delivery when it
never intended to pay for the boxes
until they were actually needed in
production;
(2)
Misrepresenting that Lots 1 through 8
were defective as an excuse for not
paying for boxes when [Ordnance] knew
that it could not use the boxes;
(3)
Misrepresenting that [Ordnance] intended
to use the official lot sample from Lot
9 forward when [Ordnance] only intended
to use the official lot sample for Lots
through 12;
(4)
Misrepresenting that Lots 9 through 20
were defective as an excuse for not
paying for boxes when [Ordnance] knew
that it could not use the boxes; and
(5)
Misrepresenting that [Ordnance] would
prosecute the waiver and other items
discussed at the May 3rd, 1995 meeting.
If you believe by clear and convincing
evidence that [Ordnance] committed fraud in
the performance of their agreement regarding
the PA 156 ammunition containers produced by
Conco then you shall find for Conco on this
matter if you are satisfied from the evidence
that:
(1)
[Ordnance] made material representations
to Conco in the performance of the PA
156 container contract;
(2)
That one or more of these
representations, as identified and
agreed to by nine or more of you, were
false;
(3)
That at the time [Ordnance] made these
representations, it knew that one or
more of them was false;
(4)
That Conco reasonably relied and acted
upon [Ordnance’s] representations; and
(5)
That Conco suffered injury or damage in
performing the PA156 contract as a
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result of one of more of [Ordnance’s]
representations.
If you are satisfied from the clear and
convincing evidence that Conco has
established each element of this claim, then
you shall find for Conco on this claim[.]
While the jury ultimately found that Ordnance did not
breach the contract, it found that Ordnance did commit fraud in
its performance of the contract and further that it breached its
duty to act in good faith.
The jury awarded total damages of
$92,281.50, $75,281.50 representing Conco’s cost over-runs and
the balance of $17,000 representing lost profits on PA156s which
were never produced.
Finally, the jury awarded $1,000,000 in
punitive damages to Conco.
On November 9, 1998, the trial court
entered judgment in favor of Conco in the amount of
$1,092,281.50.
As noted earlier, the trial court took up the issue of
damages for delay of payment following the trial.
On February
24, 1999, the trial court entered an order and judgment in favor
of Conco on this issue in the amount of $295,212.43.
In so
ruling, the trial court stated:
The Court heard avowal testimony on the
matter of damages during the course of the
trial and then placed this matter under
submission. The Court has reviewed the
testimony, considered the arguments of
counsel and believes an award of prejudgment
interest at the rate eight percent (8%) [is
warranted].
The terms of the invoice indicate that the
amount due and payable was “Net 30 days.”
Therefore, unless other arrangements were
made when Conco delivered the shipments under
the contract to [Ordnance’s] facility, the
amount was due within thirty (30) days of
receipt of the ammunition containers. No
-21-
other arrangements were made by the parties
thus interest shall be awarded as [Ordnance]
failed to pay for the “goods” in a timely
fashion. While it is true from the evidence
presented at trial there may have been
legitimate concerns by [Ordnance] as it
relates to some of the containers received,
it does not excuse their non-payment of the
entire shipment nor does it excuse their
inability to resolve their differences by
making additional adjustments or partial
payments. Delays of payment included time
periods from as little as 35 days and as much
as 1,340 days. The bulk of the containers
were shipped between December 22, 1994 and
March 24, 1995, but the payments were not
received until July 17, 19953 which is
clearly unacceptable.
The plaintiff calculated their measure of
damages based on Tennessee Code Section 4714-123, this Court, however, will apply an
eight percent (8%) calculation and therefore
the plaintiff shall recover at the daily
interest rate of .0002191 for the delays in
payment.
All post-judgment motions for relief were denied, and
this appeal followed.
I.
DID THE TRIAL COURT ERR IN REFUSING TO
DIRECT A VERDICT IN ORDNANCE’S FAVOR ON
CONCO’S CLAIMS FOR FRAUD AND PUNITIVE
DAMAGES?
Ordnance argues that the trial court erred in not
entering a directed verdict in its favor in regard to Conco’s
claims for fraud and punitive damages because (a) the jury’s
verdict on the fraud claim was not supported by evidence of a
clear and convincing nature; and (b) the punitive damage award
was not supported by evidence showing the existence of
3
It appears that the trial court was mistaken on this fact
as the record on appeal shows that the payments were ultimately
made in 1997.
-22-
aggravating circumstances.
Our review of Ordnance’s argument is
guided by the following standard:
Upon review of the evidence supporting a
judgment entered upon a jury verdict, the
role of an appellate court is limited to
determining whether the trial court erred in
failing to grant the motion for directed
verdict. All evidence which favors the
prevailing party must be taken as true and
the reviewing court is not at liberty to
determine credibility or the weight which
should be given to the evidence, these being
functions reserved to the trier of fact.
[citations omitted] The prevailing party is
entitled to all reasonable inferences which
may be drawn from the evidence. Upon
completion of such an evidentiary review, the
appellate court must determine whether the
verdict rendered is “ ‘palpably or
flagrantly’ against the evidence so as ‘to
indicate that it was reached as a result of
passion or prejudice.’ ” NCAA v. Hornung,
Ky., 754 S.W.2d 855, 860 (1988). If the
reviewing court concludes that such is the
case, it is at liberty to reverse the
judgment on the grounds that the trial court
erred in failing to sustain the motion for
directed verdict. Otherwise, the judgment
must be affirmed.
Lewis v. Bledsoe Surface Mining Co., Ky., 798 S.W.2d 459, 461-462
(1990).
FRAUD
Ordnance claims that Conco failed to show evidence that
Ordnance had a financial motive to delay paying for the PA156s.
Ordnance also claims that it was entitled to reject boxes for
defects under the terms of the contract.
We disagree.
In order to recover under an action for fraud, a
plaintiff must show the following:
(a) a material representation, (b) which is
false, (c) known to be false or recklessly
made, (d) made with inducement to be acted
-23-
upon, (e) acted in reliance thereon, and (f)
causing injury.
Wahba v. Don Corlett Motors, Inc., Ky. App., 573 S.W.2d 357, 359
(1978).
As plaintiff below, Conco was required to prove its
claim of fraud through a showing of clear and convincing
evidence.
Wahba, 573 S.W.2d at 359.
However, for purposes of
proving fraud, the clear and convincing evidence standard does
not require Conco to show direct evidence of fraud.
Instead,
Conco may meet its burden of proof by showing circumstantial
evidence of fraud.
(1983).
Grant v. Wrona, Ky.App., 662 S.W.2d 227, 229
The logic for allowing fraud to be proven by
circumstantial evidence is best stated as follows:
[I]t is not necessary that direct evidence of
fraud be adduced and that fraud may be
established by evidence which is wholly
circumstantial. [citations omitted] The
courts of this Commonwealth have long
recognized that “(p)arties contemplating the
commission of fraud do not usually blow a
horn or beat a drum to call attention to what
they are doing,” and have accordingly held
that frauds may be established by
circumstances. Bolling v. Ford, 213 Ky. 403,
281 S.W. 178 (1926). Further, even though
each bit of circumstantial evidence in and of
itself may seem trivial and unconvincing, the
combination of all the circumstances
considered together may be decisive in a
given case of fraudulent design. [citations
omitted]
Johnson v. Cormney, Ky.App., 596 S.W.2d 23, 27 (1979), overruled
in part on other grounds, Marshall v. City of Paducah, Ky. App.,
618 S.W.2d 433 (1981).
Ordnance correctly argues that
“circumstantial evidence must go far enough to induce a
reasonable conviction that the facts sought to be proved are true
and must tend to eliminate other rational theories.”
-24-
United
Electric Coal Companies v. Brown, Ky., 354 S.W.2d 502, 503
(1962).
However, “[p]roof that is clear and convincing . . .
does not lose its character merely because it is disputed or
contradicted by evidence introduced by the opposing party.”
Glass v. Bryant, Ky., 194 S.W.2d 390, 393 (1946).
Having reviewed both the trial transcripts and the
substantial number of trial exhibits, we believe that Conco met
its burden of proving fraud by clear and convincing evidence.
While the majority of Conco’s evidence of fraud is
circumstantial, “there is proof of a probative and substantial
nature carrying the weight of evidence sufficient to convince
ordinary prudent minded people.”
Rowland v. Holt, Ky., 70 S.W.2d
5, 9 (1934).
Ordnance’s claim that Neal’s testimony as well as other
testimony debunks Conco’s theory of fraud does not require
reversal.
Under the Lewis standard, we are to take the evidence
presented by Conco as true and leave questions pertaining to the
weight and credibility of the witnesses and evidence to the jury
for resolution.
Lewis, 798 S.W.2d at 461.
There were issues of material facts presented
in this case requiring submission to a jury,
and under such a circumstance, where certain
testimony must be believed and other
testimony must be consequently rejected, we
are most hesitant, even if we were so
inclined, to substitute our surmise for the
findings of a jury.
Johnson, 596 S.W.2d at 27.
We do not believe that the jury’s
verdict of fraud is palpably or flagrantly against the evidence
presented at trial.
PUNITIVE DAMAGES
-25-
Ordnance maintains that it should have been granted a
directed verdict on Conco’s claim for punitive damages because
Conco failed to prove by clear and convincing evidence that
Ordnance acted outrageously in conjunction with its performance
of the PA156 contract.
We disagree.
Ordnance correctly asserts that “[t]he threshold for
the award of punitive damages is misconduct involving something
more than merely commission of a tort.”
683 S.W.2d 250, 252 (1984).
Fowler v. Mantooth, Ky.,
Ordnance is also correct in arguing
that “a plaintiff is not entitled to an instruction on punitive
damages merely because the plaintiff has met his burden of
production on an intentional tort such as fraud.”
Miller’s
Bottled Gas, Inc. v. Borg-Warner Corporation, 56 F.3d 726, 734
(6th Cir. 1995).
However, the reasoning of these two cases does
not apply to the case at hand due to the application of KRS
411.184.
KRS 411.194(2) provides that a plaintiff may recover
punitive damages upon showing “by clear and convincing evidence,
that the defendant . . . acted toward the plaintiff with
oppression fraud or malice.”
Thus, under the provisions of this
statute, Conco was “entitled to have the jury consider punitive
damages because [it] had demonstrated fraud by clear and
convincing evidence.”
United Parcel Service Co. v. Rickert, Ky.,
996 S.W.2d 464, 470 (1999).
In so ruling, we are aware that the
Kentucky Supreme Court declared certain provisions of KRS 411.184
unconstitutional in Williams v. Wilson, Ky., 972 S.W.2d 260
(1998).
However, as Ordnance concedes in its brief on appeal:
-26-
[since Conco] did not challenge the
constitutionality of the statute at trial and
since the statute was in effect at the time
of . . . the trial, we will review the
question under the terms of the statute as it
then existed.
Bowling Green Municipal Utilities v. Atmos Energy Corp. Ky., 989
S.W.2d 577, 580 (1999).
See also Rickert, 996 S.W.2d at 470; and
Hanson v. American National Bank & Trust Company, Ky., 865 S.W.2d
302, 310 (1993).
Ordnance also argues that the trial court erroneously
instructed the jury on the issue of punitive damages because
Ordnance did not ratify or authorize any improper action on
behalf of its employees as required by KRS 411.184(3).
As this
argument was not presented to the trial court we are without
authority to consider its merits on appeal.
Regional Jail
Authority v. Tackett, Ky., 770 S.W.2d 225, 228 (1989).
II.
DID THE TRIAL COURT ERRONEOUSLY DENY
ORDNANCE’S MOTION FOR A NEW TRIAL?
Ordnance claims that it was entitled to a new trial
under CR 59.01 (d) and (f).
We will not reverse a trial court’s
refusal to grant a new trial in the absence of an abuse of
discretion on behalf of the trial court.
Speck v. Bowling, Ky.
App., 892 S.W.2d 309, 313 (1995).
Under CR 59.01(f), a new trial may be granted upon a
showing “[t]hat the verdict is not sustained by sufficient
evidence or is contrary to law.”
To the extent Ordnance
maintains that the jury’s verdict is not sustained by the
evidence, it must show that the verdict was both palpably and
flagrantly against the evidence presented at trial.
-27-
Nugent v.
Nugent’s Ex’r., Ky., 135 S.W.2d 877, 883 (1940).
Aside from
merely claiming that the verdict in this case was not supported
by evidence or contrary to law, Ordnance presented no argument to
illustrate why it is entitled to relief under CR 59.01(f).
Thus,
this argument must fail.
Under CR 59.01(d), a new trial may be granted if the
appellant can show “[e]xcessive . . . damages, appearing to have
been given under the influence of passion or prejudice or in
disregard of the evidence or instructions of the court.”
Our
standard of review in this area is as follows:
[I]t is the primary function of the trial
judge to determine whether, at “first blush”
and in accordance with the criteria set forth
in CR 59.01(d), (e), and (f), the verdict is
excessive. On appeal, the trial judge’s
determination is considered presumptively
correct and will be reversed only if “clearly
erroneous.”
Owens-Corning Fiberglass Corporation v. Golightly, Ky., 976
S.W.2d 409, 414 (1998)(citations omitted).
In arguing that the punitive damage award is excessive,
Ordnance focuses almost entirely on the fact that the punitive
damages verdict is more than ten times the compensatory award.
While the ratio between actual and punitive damages may be
considered in reviewing a punitive damage award for
excessiveness, it is not the sole deciding factor.
The United
States Supreme Court has noted its refusal to rely on “an
approach that concentrates entirely on the relationship between
actual and punitive damages.”
TXO Production Corp. v. Alliance
Resources Corp., 509 U.S. 443, 460, 113 S.Ct. 2711, 2721, 125
L.Ed.2d 366, 381 (1993).
See also BMW of North America, Inc. v.
-28-
Gore, 517 U.S. 559, 116 S.Ct. 1589, 134 L.Ed.2d 809 (1996).
In
addition to the reasonableness of the ratio between punitive and
actual damages, we are also to consider:
the amount of money potentially at stake, the
bad faith of the party against whom judgment
was rendered, whether a scheme was employed
which was part of a larger pattern of
trickery, fraud and deceit, and the wealth of
the offending party.
Hanson, 865 S.W.2d at 311.
As Ordnance’s argument only addresses
the correlation between the actual and punitive damage award and
does not address the additional requirements set forth in Hanson,
we do not believe that the disparity in this case is enough, on
its own, to justify a finding that the trial court’s decision was
clearly erroneous.
Ordnance maintains that counsel for Conco inflamed the
jury by (1) telling it during opening arguments that Ordnance is
“part of “the world’s largest defense contractor” and that its
parent corporation manufactures the space shuttle, the F16, and
the C5A transport plane;” and (2) referring metaphorically to the
fact that David killed Goliath with five smooth stones during
closing argument.
As no objection was made to these statements,
we will not consider this argument on appeal.
Louisville & N.R.
Co. v. Howe, Ky., 255 S.W.2d 979, 980 (1953).
III.
SHOULD THE TRIAL COURT’S AWARD OF
PRE-JUDGMENT INTEREST BE VACATED OR
REDUCED?
As we noted earlier, the trial court reserved for
itself the question of whether Conco was entitled to an award of
pre-judgment interest pursuant to the directive of the Kentucky
Supreme Court in Nucor Corporation v. General Electric Co., Ky.,
-29-
812 S.W.2d 136 (1991).
The trial court heard testimony on this
issue under avowal during trial.
Because the issue of whether
Ordnance breached the terms of the contract due to its delay in
payment was reserved specifically for the trial court to resolve,
it was not inconsistent for the trial court to find that
Ordnance’s late payment breached the Net 30 day provisions of the
contract despite the fact that the jury found that no breach
occurred as to the balance of the contract.
Ordnance also maintains that its ultimate payment to
Conco in 1997 was timely under the terms of the contract,
specifically under portions of the contract which provided that
the payment period was to begin from either the date of invoice
or the date acceptable goods were delivered to Milan, whichever
occurred last.
Ordnance maintains that the PA156s were not
acceptable until the Army granted the wavier in July 1996 and
that once the waiver was granted it paid Conco.
We find Ordnance’s proposed interpretation of the
contract to be extremely tenuous.
Under Ordnance’s
interpretation, it could merely receive shipments of goods into
inventory and then put off inspection indefinitely, thus
potentially forever forestalling its duty to pay.
We find that
the trial court’s interpretation of the contract is reasonable
and supported by the evidence.
Alternatively, Ordnance maintains that Conco is only
entitled to pre-judgment interest from the date the Army issued
its waiver.
Ordnance’s own behavior concerning the issuance of
the waiver precludes this argument.
-30-
The evidence shows that
Ordnance agreed to seek a waiver at the May 1995 meeting.
Once
Conco provided it with information necessary to procure a waiver,
Ordnance sat on that information before sending the request to
the Army.
Even when Ordnance forwarded the waiver request, it
withheld pertinent information, and it was not until Conco
provided this information directly to the Army in February 1996
that the waiver was ultimately issued.
Had Ordnance promptly
provided all necessary information to the Army following the May
1995 meeting, its argument may have had some merit.
However,
Ordnance cannot be the beneficiary of its own delay in the
procurement of the waiver.
Having considered the parties’ arguments on appeal, the
trial court’s order and judgments of November 9, 1998, and
February 24, 1999, are affirmed.
CONCO’S CROSS APPEAL
In an amended complaint filed with the trial court on
February 19, 1998, Conco asserted a claim for tortious
interferences against Ordnance in which it alleged that
Ordnance’s conduct caused it to lose a contract to produce
ammunition containers for the Hydra missile system (the Hydra
contract).
Conco alleged that prior to the PA156 contract it had
been assured by Ordnance’s Vermont division that it would receive
the Hydra contract, and that shortly after the May 3, 1995
meeting involving the PA156s at which one of Ordnance’s Vermont
employees attended, it was notified that it was not going to be
considered for the Hydra contract.
-31-
Ordnance maintained that Conco was excluded from
further consideration for the Hydra contract because the price it
submitted was two million dollars higher than the company which
ultimately received the contract.
Conco alleged that Ordnance
faxed it a request for a final and best offer on the Hydra
contract on September 16, 1995, after Conco had been told that it
was no longer being considered, and that this was an attempt by
Ordnance to establish a record of competitive bidding in order to
limit future liability.
Conco did not respond to the bid
request.
At the conclusion of Conco’s case, Ordnance moved for a
directed verdict on Conco’s tortious interference claim.
Ordnance argued that Conco’s claim could not succeed because
Conco could not show that Ordnance interfered in Conco’s business
relations with a third party.
The trial court granted Ordnance’s
directed verdict motion on the tortious interference claim.
During cross-examination of Ordnance’s damages expert,
the issue of the Hydra contract came up again when Conco asserted
that damages stemming from the loss of the Hydra contract were
recoverable as fraud damages because Ordnance’s wrongful
rejection of the PA156 lots cost Conco the Hydra contract.
This
appears to be the first time that Conco asserted that these
damages could be recovered under the fraud claim as opposed to
the now-defunct tortious interference claim.
Ordnance argued
that whether Conco framed the issue as tortious interference,
fraud, or breach of contract, it could not recover damages for
loss of the Hydra contract because there is no right to force
-32-
someone to do business with you.
The trial court sustained
Ordnance’s objection as to any further testimony regarding
damages for the loss of the Hydra contract.
At the close of evidence, Ordnance moved for a directed
verdict on Conco’s claim for damages stemming from the loss of
the Hydra contract.
Ordnance maintained in its argument before
the trial court that “[t]here is no authority for suing your
customer when he doesn’t do further business with you into the
future.”
Ordnance also took issue with the fact that Conco had
practiced this claim as a tortious interference claim up until
the trial court granted a directed verdict in its favor and then
attempted to argue that the damages could be recovered under the
fraud claim.
The trial court reaffirmed its entry of directed
verdict in favor of Ordnance.
On appeal, Conco maintains that the trial court erred
in granting a directed verdict in Ordnance’s favor and asserts
that it should have been permitted to present the loss of the
Hydra contract “to the jury as the natural and proximate result
of [Ordnance’s] fraud and breach of the implied covenant of good
faith and fair dealing.”
We disagree.
Conco is correct that “the victim of fraud is entitled
to compensation for every wrong which is the natural and
proximate result of the fraud.”
Sanders, Inc. v. Chesmotel
Lodge, Inc., Ky., 300 S.W.2d 239, 241 (1957).
However, we agree
with Ordnance that in the absence of any contractual agreement to
do business with Conco in the future, it had no duty to do future
business with Conco, and, as Ordnance points out in its brief on
-33-
appeal, “its decision to exclude Conco from further consideration
on the Hydra contract is not legally actionable[.]”
The orders and judgment of the Jefferson Circuit Court
are affirmed.
ALL CONCUR.
BRIEF FOR APPELLANTS:
BRIEF FOR APPELLEE:
Byron E. Leet
C. Tyson Gorman
Louisville, KY
William Jay Hunter, Jr.
D. Randall Gibson
Dennis D. Murrell
Louisville, KY
ORAL ARGUMENT FOR APPELLANTS:
ORAL ARGUMENT FOR APPELLEE:
Byron E. Leet
Louisville, KY
William Jay Hunter, Jr.
Louisville, KY
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